Diversity is Good Business

By Nancy E. Oates

Several studies have shown the benefits of diversity in small groups and teams, and how a mix of viewpoints results in better decisions. Now, researchers from NC State’s Poole College of Management have extended that concept to the economy at large.

Their findings? Diversity is good for business.

Measuring the Impact of Diversity on Innovation

Poole College professors Richard Warr and Roger Mayer collaborated with Jing Zhao, now on the faculty of Portland State University, to examine how the way a company treats its employees impacts innovation. They focused on diversity by counting the number of new-product announcements and patent filings and citations, as measures of a firm’s innovation, and compared that to each business’s corporate policies that promote a culture of diversity, specifically the treatment of women and minorities.

Their research, “Do Pro-Diversity Policies Improve Corporate Innovation?” is forthcoming in the journal Financial Management.

“It seems an obvious question to ask, and a fairly important question,” said Warr, professor of finance and head of the business management department at Poole College. “The answer was pretty obvious, but no one had looked at the bigger picture of diversity and innovation.”

Their results suggest a channel through which workforce diversity may enhance firm value.

Warr, widely published in the finance field, and Zhao, who at the time was an assistant professor of finance at NC State, came up with the idea for the study. As finance experts, they were comfortable with numbers and were used to thinking about money, prices and returns. Plus, they had access to big data sets, such as the MSCI ESG (environmental, social and governance) Indexes, which provide diversity policy data on the 3,000 largest publicly traded companies in the U.S.

Numbers Don’t Tell the Whole Story

But numbers don’t tell the whole story. They needed to learn about organizational behavior and culture.

“We said, ‘We need to find someone who understands that and can explain it to us,’ ” Warr said.

That’s where Mayer comes in. A professor of management, innovation and entrepreneurship, he is a renowned scholar of trust in organizations. His research has been cited tens of thousands of times in published literature across a wide variety of fields.

The relationship between organizations and the people who work for them has fascinated Mayer throughout his academic career. His research focuses on how that relationship affects a company’s effectiveness and productivity. The topic proposed by Warr and Zhao caught his attention. Mayer’s studies involve smaller groups of people — typically in the hundreds — and he uses surveys to collect information directly from the subjects. Analyzing data at the macro level to connect corporate policy with innovation was new to him.

“This was an intriguing way of looking at a problem that I’ve been looking at for decades,” Mayer said. “And it used data and methodology not accessible to me.”

Gauging Innovation

To gauge innovation, the researchers collected information from the U.S. Patent Office on patents filed and data on patent citation. The university also purchased, at their request, the Capital IQ Key Development Data that contained data on new-product announcements. Taken together, these datasets provided a quantifiable measure of innovation.

If we change diversity, does it predict a future change in innovation? The result was yes.

Then they analyzed the data in the MSCI indexes to learn which companies had policies that encouraged the promotion and retention of a workforce diverse in gender, race and sexual orientation.

Rather than stop when they found correlation between pro-diversity policies and innovation, they ran two sets of tests.

“First we asked, ‘If we change diversity, does it predict a future change in innovation?’ The result was yes,” Warr said. “Then we reversed it. Does a change in innovation affect a future change in diversity? We found no relationship.”

By demonstrating that a past change in diversity causes a future change in innovation, but not the other way around, the researchers showed causality.

Impact: The Argument for Diversity and Inclusion

The study has been well-received by other academics and in the popular press. Companies in competitive industries — “which is pretty much everybody,” Warr said — know that teams with greater diversity get better results. “They have been wanting a comprehensive, robust, statistically well-done study that proves it,” he said. “That’s what ours does.”

With the business community and society at large asking questions about the role of equality in the workforce as it plays out in such areas as immigration and whether to extend benefits to same-sex partners, the study results are particularly timely. In a competitive business climate, companies value innovation as a way to keep themselves fresh and set themselves apart. The research findings reveal a solid economic reason for diversity.

“If you want to be innovative, you should embrace a wide range of qualified, talented people to work for you,” Warr said. “Cast your net as wide as possible, then hire the people with the best skills.”

And then, create the sort of environment where they want to work, where they feel welcome and their contributions are valued.

If you want to be innovative, you should embrace a wide range of qualified, talented people to work for you. Cast your net as wide as possible, then hire the people with the best skills.

Warr and Mayer expect to continue their collaboration. They want to probe for other explanations for their findings. For instance, pro-diversity policies don’t happen by accident. They likely would have been instituted by an enlightened management team.

“We haven’t gotten to the root of the question,” Warr said. “What is the management thought process that leads to putting those policies in place?”

The study has received quite a bit of attention in the media. Articles about the researchers and their findings have been published in Fast Company and Psychology Today, and NBC News and National Public Radio each produced a segment on the implications of the research. The work is in line with results of prior studies on diversity in teams.

“You don’t have to suspend your belief in the way things work to believe the story,” Warr said. “It makes sense. It’s a strong argument for embracing diversity and inclusivity. There’s real money to be made from diversity and inclusion.”